Recovery maybe, but watch the margins

23rd July 2014

The politicians and popular press like to suggest that the country is now firmly on the road to recovery. Roll on the good times. But one of the consequences that we are noticing is that, as the economy grows, the struggle over recent years has resulted in increased competition and a reduction in margins. Prices aren’t what they used to be and, unless you have something really unique, margins have been squeezed.

Many business mentors and consultants argue that a business should stick to its guns on pricing and not get involved in what can only be a race to the bottom. But that’s hard to do in the real world, where you’re dealing with a growing number of start-ups in both trades and professions.

This painful squeeze has created another problem. In many business models there was a need to visit the customer and spend considerable effort on quoting for work. With reasonable margins this was fine as the ratio of wins to quotes meant that the time spent on tendering eventually resulted in profitable work. 

Which covered the time lost on those quotes that, for whatever reason, never came in. 

But with reduced margins, the time spent pitching for work now results in some serious losses. At the same time, with diminishing credit available to small firms, it’s becoming even harder to hold onto the working capital needed to fund new orders.

Sooner or later, even for the best of jugglers, the firm runs short of cash and the stressed business owner realises that things have to change.

So what can be done? The first thing to do, with the help of an experienced business adviser, is to take a step back and try to see the bigger picture. Easy to say and hard to do when everyone is chasing you. Yet one of our observation is the pressing need to re-engineer the business model. Up to date book keeping is now vital to get a real time view of overheads and provide more immediate information on cash flow and working capital requirements going forward. 

Whilst many may have a rough idea, very few small businesses have a firm grip on the cash requirements over the next three months. The next bit of the puzzle is to try and keep costs variable so that if new orders do get stretched, fixed costs don’t eat away at the cash needed for the taxman and others. Zero hours contracts, outsourcing work or using sub contractors can help a business vary its staffing costs and provide flexibility.

Other possibilities? How about giving customers little gifts for prompt payment and being innovative about funding, perhaps looking at peer to peer lending or crowd funding as a way of funding capital equipment. As they say, being a busy fool has never been easier but it’s cash that really matters.